Aust bonds lower on fiscal cliff concerns

AUSTRALIAN bond futures prices are higher following a warning that little progress has been made in negotiations between US Democrats and Republicans trying to avoid automatic tax hikes and spending cuts.

Commonwealth Bank interest rate strategist Phillip Brown on Wednesday said local bond futures rallied overnight after US Senate Majority Leader Harry Reid, a Democrat, warned little headway had been made in the talks.

"The market reacted pretty strongly to that. It caused a rally in US bonds which flowed through to our market," he said.

The tax hikes and spending cuts, which have been labelled a 'fiscal cliff' because of fears they would cause a recession, are due to come into effect from early 2013 unless US politicians can agree to alternative measures to reduce the country's budget deficit.

Mr Brown said the key local event for the bond market this week would be the release of capital expenditure data on Thursday, which will provide an insight into the expected strength of mining investment in 2013.

At 0830 AEDT on Wednesday, the December 10-year bond futures contract was at 96.835 (implying a yield of 3.165 per cent), up from 96.785 (implying a yield of 3.215 per cent), on Tuesday.

The December three-year bond futures contract was trading at 97.310 (2.690 per cent), up from 97.270 (2.730 per cent).